Chapter 09 – Foreign Currency Transactions and Hedging Foreign Exchange Risk – Hoyle, Schaefer, Doupnik, 13e
38. (30 minutes) (Forward contract fair value hedge of a foreign currency firm
commitment (purchase))
Forward Forward Contract Firm Commitment
Rate to Change in Change in
Date 10/31 Fair Value Fair Value Fair Value Fair Value
8/1 $.60 $0 – $0 $0
a. Journal entries
8/1 There is no entry to record either the purchase agreement or the
forward contract as both are executory contracts.
9/30 Forward Contract 23,762.40
Gain on Forward Contract 23,762.40
b. Assuming the inventory is sold in the fourth quarter, the net impact on net
income is negative $240,000:
c. The net cash outflow is $240,000.
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Education.
39. (30 minutes) (Option fair value hedge of a foreign currency firm commitment
(sale))
Firm Commitment Option Option
Spot Change in Premium Change in
Date Rate Fair Value Fair Value for 9/1 Fair Value Fair Value
a. Journal Entries
6/1 Foreign Currency Option 2,000.00
Cash 2,000.00
There is no entry to record the sales agreement
because it is an executory contract.
6/30 Loss on Firm Commitment 5,881.80
Chapter 09 – Foreign Currency Transactions and Hedging Foreign Exchange Risk – Hoyle, Schaefer, Doupnik, 13e
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Education.
39. (continued)
b. Impact on Net Income
The impact on net income for the second quarter is:
Loss on Firm Commitment $(5,881.80)
c. Net Cash Inflow
The net cash inflow resulting from the sale is:
Chapter 09 – Foreign Currency Transactions and Hedging Foreign Exchange Risk – Hoyle, Schaefer, Doupnik, 13e
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40. (30 minutes) (Option fair value hedge of a foreign currency firm commitment
(purchase))
Firm commitment to pay 100,000 forints on 12/20. Option with strike price of
$0.50 acquired on 11/20.
Firm Commitment Option Option
Spot Change in Premium Change in
Date Rate Fair Value Fair Value for 12/20 Fair Value Fair Value
11/20 $0.50 – – $0.01 $1,000 –
a) 12/20 $0.53 $(3,000)1 – $3,000 $0.033 $3,000 + $2,000
a. The option strike price ($0.50) is less than the spot rate ($0.53) on December
20, the date the parts are to be paid for. Therefore, Spitz will exercise its
option. The journal entries are as follows:
11/20 Foreign Currency Option 1,000
Cash 1,000
There is no entry to record the purchase agreement
because it is an executory contract.
12/20 Loss on Firm Commitment 3,000
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40. (continued)
By 12/31 Cost-of-Goods-Sold 53,000
Merchandise Inventory 53,000
Firm Commitment 3,000
Adjustment to Net Income 3,000
(This final entry is made in the same period when inventory affects
net income through cost-of-goods-sold, i.e., prior to 12/31)
b. The option strike price ($0.50) is greater than the spot rate ($.48) on December
20, the date the parts are to be paid for. Therefore, Spitz will allow the option
to expire unexercised. Foreign currency will be acquired at the spot rate on
December 20. The journal entries are as follows:
11/20 Foreign Currency Option 1,000
Cash 1,000
Chapter 09 – Foreign Currency Transactions and Hedging Foreign Exchange Risk – Hoyle, Schaefer, Doupnik, 13e
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Education.
41. (20 minutes) (Option cash flow hedge of a forecasted transaction)
a. A foreign currency option with a strike price of $0.58 was purchased on
12/15/17 for $5,000 (1 million marks x $.005) when the spot rate was $0.58.
Because the strike price and spot rate are identical, the option has no
intrinsic value at this point in time. The fair value of the option of $5,000 is all
attributable to time value. The journal entry to record the purchase of the
option is:
the time value of the option at 12/31/17 is $4,000. There is a $1,000 decrease
in the time value of the option since 12/15/17. The journal entries to recognize
the increase in the fair value of the option and the decrease in the time value
of the option are:
12/31/17 Foreign Currency Option 3,000
AOCI 3,000
To recognize the increase in the value of
Chapter 09 – Foreign Currency Transactions and Hedging Foreign Exchange Risk – Hoyle, Schaefer, Doupnik, 13e
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41. (continued)
3/15/18 Foreign Currency Option 2,000
AOCI 2,000
To recognize the increase in the value of the
Foreign Currency Option with the counterpart
Additional journal entries recorded on 3/15/18 are:
Foreign Currency (marks) 590,000
Cash 580,000
Foreign Currency Option 10,000
To record exercise of the foreign currency
To transfer the amount accumulated in AOCI
as an adjustment to net income in the period
in which the forecasted transaction occurs.
b. Impact on net income: 2017 – Option Expense $(1,000)
c. Net cash outflow for parts: $585,000 = ($5,000 + $580,000)
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Education.
42. (60 minutes) (Unhedged foreign currency transaction; forward contract and
option hedge of foreign currency liability; forward contract and option hedge
of foreign currency firm commitment (purchase))
Part a. Foreign Currency Liability (Unhedged)
9/15 Inventory 200,000.00
Accounts Payable (euro) 200,000.00
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42. (continued)
Part b. Forward Contract Fair Value Hedge of a Foreign Currency Liability
Accounts Payable (C) Forward Forward Contract
Spot U.S. Dollar Change in U.S. Rate to Change in
Date Rate Value Dollar Value 10/31 Fair Value Fair Value
2 $220,000 – $212,000 = $8,000.
9/15 Inventory 200,000.00
Accounts Payable (euro) 200,000.00
There is no formal entry for the forward contract.
9/30 Foreign Exchange Loss 10,000.00
Accounts Payable (euro) 10,000.00
Chapter 09 – Foreign Currency Transactions and Hedging Foreign Exchange Risk – Hoyle, Schaefer, Doupnik, 13e
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42. (continued)
Part c. Forward Contract Fair Value Hedge of a Foreign Currency Firm
Commitment (Purchase)
9/15 There is no formal entry for the forward contract or the purchase order.
9/30 Forward Contract 5,940.60
Gain on Forward Contract 5,940.60
Foreign Currency (euro) 220,000.00
The following entry is made in the period when the inventory affects net income
through cost-of-goods-sold: